All Forum Posts by: Rodney Sums

Why I Believe Striving to Build Passive Income is Overrated

This may seem like a disingenuous statement coming from a passive income guy, BUT, I believe that those looking to build sustainable look term wealth would be better off to downplay passive income.

Passive income has a role, a large role, but one best utilized when a certain level of wealth has been achieved, and the holder of said wealth is looking to preserve capital and live off the income generated by passive investments.

I hear many relatively new real estate investors say that their goal is to acquire enough real property to replace their earned (W-2 or 1099 or Sch C) income with the income be generated by their investments.  The problem with this is that they tend to place INCOME as the main feature of any investment they’re currently considering, and their decision making process centers around how a particular investment will fit into their ULTIMATE portfolio, the one that is large enough to generate all that income which will replace their earnings, and still grow enough to offset inflation.

In my opinion, what the investor in this situation should be doing is concentrating on WEALTH BUILDING, not passive income.  The investments should be chosen based on increased wealth, so that an investment in land, providing no income, but likely to triple in value in 24 months, would be chosen over a office building throwing off 12% income, but unlikely to increase in value.  Both these investments may be good; but for the “wealth accumulation” stage the land that triples in value is clearly the better choice. (This is obviously a simplification; one must consider risk, personal comfort, ability to manage, etc.).

The wealth builder should always consider selling or trading his property for a property that will increase his net worth FASTER.  Investors tend to fall in love with certain properties they own, and stick with them even if something better comes along.  The wealth builder should be agnostic about property; the BEST investment is the one that brings them closer to their wealth building goal the fastest. 

Now, somewhere along the path to wealth accumulation, it may be proper for the wealth builder to place a portion of their assets in passive investments throwing off significant income, if only for portfolio diversification. And we need to distinguish between passive income investments and passive investment that strive for capital gains and or increasing value.  So for the wealth builder, a projected 20% return on a passive equity investment is better than a 10% income return on a passive debt investment.  

Here’s my bias in general terms. First $50k of investment capital should go into a money market fund or similar.  Next $500k should go into real estate equities, active or passive.  Next $1 million split between income and equity.  After that it becomes very personal depending on investors goals, abilities, interests, etc. 

What do you think?

Hi im a noob. But starting and learning terminology now. Really excited. This seminar I attend offering mentorship program for 40k for 2 years. Is this good deal??

Real estate is harder than it's been in more than a decade -- we all know this. High prices + high mortgage rates + low inventory is making this a challenge. So my question is  -- in an era where you can get a 5% CoCR from bonds, money market accounts, or a high-yield savings account is RE still the best place to put your money? 

I'll give you my opinion below, but curious to hear what you all think. 

Here's my take, and you probably won't find this shocking, but RE is still the best asset class. I am what I would call a 'total return investor' -- which is that I don't care as much about cashflow, or tax benefits, or appreciation in particular -- I'm in it for the whole package. And when you look at it that way, RE is still the clear winner. 

I just put a deal under contract that was on market. It will generate about 4% CoCR, and 2% in amortization. Even with a very modest expectation of 2% annual appreciation, I will earn about 6% there (thanks leverage!), and tax benefits will give me another 1.5%. If I add that all up, I am getting somewhere between a 12-15% annualized return, for an on-market deal that just needs some cosmetic upgrades. 

Compare that to bonds (5%), or the average return in the stock market (8-10% depending on who you ask) and REI is a no-brainer to me. Am I missing something here?!?

Sure you could say that RE is at all-time highs and is going to come down. It's possible, but a big correction in residential RE is not likely, and over a long hold period, RE will appreciate. Plus, I am generating modest cashflow now + amortization and tax benefits.  Also, the same can be said about the stock market. It's also at all-time highs, and its historical far more volatile than RE. 

Now you may be thinking that owning RE is more work than the stock market, and that is undoubtedly true. But the difference between 10% and 12% over a long hold period is enormous. For an investment of $100,000, over a 10 year hold the difference in total return between a 10% annualized rate, and 12% is $51,000. For some that might be worth the work of REI, for others not so much. BUT -- if your hold period is 30 years the difference grows to $1.25M!! Gotta love compounding.

 So, back to my original question. Is RE still the best asset class? For me -- a 36 year old who plans to keep working for the next several decades -- there's no doubt in my mind. I will gladly take on the extra work of owning RE, given that, even with more difficult conditions, RE still has a very high probability of delivering me outsized returns over my investing career. 

What do you all think? 

I love where you mind is at and how organized your post/plan is. Also love that you guys are getting started so young. I did my first deal at 25 years old (a house hack) and getting started early benefited me in many ways.

It'll be tough finding multifamily deals where the numbers make sense right now. Multifamily pricing is really high in the A and B neighborhoods around Scottsdale and Phoenix. With high price per door and high rates, you wont find any cash flow.

STR market is also very saturated and we're seeing more regulation there.

I'd keep the end goal bigger multifamily deals. And for the short term goal, do a house hack as you have planned.

If you need any more direction send me a message. Would be happy to meet up and discuss your goals in more detail.

My fiancé owes a small 2bed 2bath townhouse outright. It was her primary with a roommate until she moved in with me, now it is rented fully. It is valued at $1.3mil and she bought for $550k 5 years ago so not a bad return at all. Currently she only rents it for $2500mo because affordable housing is an issue in our small town..also STR is not allowed per the town. Now we are considering selling it to buy a more cash flowing property. Maybe some MFR in a bigger town an hour away. We would 1031. Pros and cons to this idea?

For clarification this is for a fix and flip, not a rental.  But I do appreciate the advice.  I found a great deal at Floor and Decor for high-end, waterproof vinyl. Thanks!

 Thank you. This is exactly the advice i was looking for. This makes perfect sense!

I was able to secure a deal with some cash down and the rest seller financed. Seemed pretty straight forward but the seller is being a little difficult. First, they didn't want me to do a loan because they didn't want a second position loan. Okay, I get it. Offer changed to cash and seller finance and sent over. Now they're asking my partner and I to send a full credit report and a settlement statement from a house I just sold!

Is this normal and should I be giving them all this information because they're technically a "bank"? Mostly any bank would run a credit report if they were originating a loan but C'MON. 

I should also add that this one is going in my name as my primary residence but does that change anything? Should I be putting this in a LLC anyway and does that change anything?

Quote from @Marcus Auerbach:

Zillow Credit Scores are not only wrong, they are totally random!! When you hit print on a Zillow Application Credit Score, you get a different result every single time. WTH!!  Can someone explain this?

I tested this several times, even went to a differnt computer. The 3 examples below were printed within minutes. Its basically pick your own score. If you did not like the first one, just print another one. I did some research and looks like I am not the first one to discover this?

There is no way Zillow is not aware of this!!

We have literally an eviction at the moment with someone, who per Zillow had excellent credit. We based the decision on the score shown on the screen and when the troubles started we brushed it off as a misunderstanding, because the person had excellent credit. Until we discovered the score is different every time you print!

Can someone verify what we are experiencing here?

 WTAF...

Hey guys, I'm based in a very recreation-heavy area in Central Oregon.  We already have a saltwater high-end hot tub and are also considering getting a sauna. Any strong opinions on the idea of getting a sauna? Smart or dumb?  Liability issues?